PHL financial system remains resilient but faces ‘moderate’ risks

The country’s financial sector is seen to remain robust and is well-positioned to absorb shocks, the Bangko Sentral ng Pilipinas (BSP) said, but noted external headwinds that pose risk to the sector.

“The Philippine financial system remains resilient but faces moderate risks that warrant close monitoring,” the BSP said in its latest financial stability report.

“The propagation of global uncertainties, including heightened geopolitical tensions, evolving monetary policies in major economies, and potential shifts in the United States following the outcome of the presidential elections could impact the Philippine economy.”

In the report, the BSP said the banking sector growth will be supported by ample buffers and stable financial markets.

“Banks have high capital buffers and ample liquidity, which would allow the financial system to absorb potential losses and/or support economic activity,” it said.

“Financial markets are stable with no signs of asset price misalignments and high share of domestic investor participation.”

The Philippines’ international reserves are also deemed adequate and can cushion the country from shocks, it added.

Latest data showed the country’s dollar reserves rose by 3.3% month on month to $106.65 billion as of end-February. This was also 4.6% higher than $101.99 billion in the same period a year ago.

“On balance, the banking sector remains healthy as characterized by limited endogenous risks or internal weaknesses,” the central bank said.

“Nonbank financial institutions (NBFIs), although small compared with the size of the Philippine banking system, expose banks to common exposure risk through their shared investments and holdings.”

Credit supply is also seen to remain stable amid improved profitability, robust capital base and ample liquidity.

“Although growth is slower than pre-pandemic levels, the banking system is well-positioned to support the domestic economy, with an expansion in its lending portfolio.”

Bank lending jumped by 12.8% to P13.02 trillion in January, its fastest pace in over two years.

INFLATIONARY PRESSURES

However, the BSP flagged global risks such as inflationary pressures and changing economic policies.

It cited the World Uncertainty Index (WUI) and the Global Economic Policy Uncertainty (GEPU) Index, which have been on an upward trend.

“The cost of production materials (especially in the industrial sector) may accelerate due to supply-chain disruptions amid geopolitical instability and lag-effects of global monetary policy easing.”

Primary risk considerations include disruptions in global supply chains and logistics, the BSP said.

Banks also face asset valuation risks, the BSP said, citing elevated nonperforming loans (NPL) and growth in unsecured consumer loans.

The industry’s NPL loan ratio rose to 3.38% in January from 3.27% in December. This was the highest in two months or since the 3.54% in November.

“Recent global uncertainty stems from concerns on geopolitics and economic policies that affect international trade and investment flows.”

“A ‘macro-market disconnect’ — when macroeconomic risks are not properly priced in by market players — could affect asset valuations and may be subject to severe corrections.”

Capital flight is another risk financial markets could face, it added. Foreign investors account for about 46% of trading in the local bourse.

“Portfolio flows reflect investor risk sentiment and translate to FX (foreign exchange) movements. Portfolio investments are vulnerable to outflows.”

Risks also stem from debt servicing and high “maturity walls,” the central bank said.

“Corporate earnings are reverting to pre-pandemic levels. However, increased leverage and sustained funding mismatches especially in large corporates pose vulnerabilities.”

“Significant reliance on bank funding and the degree of interconnectedness among corporates with Domestic Systemically Important Banks (DSIBs) could amplify risks to the financial sector,” it added.

The BSP said the “interconnectedness of large conglomerates to the banking system may expose the financial system to risks coming from the corporate sector given increasing leverage and funding mismatches.”

The sector also faces emerging risks from financial technology such as artificial intelligence adoption.

“While innovations can enhance efficiency and financial inclusion, the increasing influence of technology also introduces new challenges, such as cybersecurity threats, operational risks, system failures or algorithmic errors, and biases that could undermine regulatory compliance.”

Meanwhile, the BSP noted further monetary easing, which would also bolster the financial system’s growth.

“The transition towards an accommodative interest rate environment could encourage investment in capital-intensive projects, business expansion, and household consumption.”

“Looser financing conditions could pave the way for enhanced credit availability for businesses and consumers to ramp up investments and rebuild savings as buffer to shocks.”

The BSP began its easing cycle in August last year, cutting rates by a total of 75 basis points (bps) by end-2024.

Despite delivering a pause last month, the central bank has said it is still on an easing trajectory. BSP Governor Eli M. Remolona, Jr. has signaled the possibility of a 25-bp cut at the Monetary Board’s meeting on April 10.

“Priority measures could enhance the stability and resilience of the Philippine financial system if aligned with monetary policy and banking supervision,” the BSP said.

It also called for the further enhancement and deepening of capital markets; improvement of reporting frameworks; and development and adoption of macroprudential tools.

Source: Business World

Philippines’ mental state worsens in 2024

The Philippines’ average Mental Health Quotient (MHQ) fell to 68.67 in the 2024 edition of the Mental State of the World Report by US-based not-for-profit organization Sapien Labs.

Despite this, the country scored above the global average quotient of 62.84.

The index measures a country’s overall mind health and well-being based on six dimensions: mood and outlook, social self, adaptability and resilience, drive and motivation, cognition, and mind-body connection.

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Source: Business World

Moody's now expects PH to miss GDP target

Moody's Analytics trimmed its economic growth forecasts for the Philippines to below 6% for this year and 2026, reflecting the impact of uncertainties arising from the United States’ tariff policies.

However, Moody’s Analytics economist Sarah Tan said the Philippines still stands out as one of the fastest-growing economies in Southeast Asia.

Moody’s Analytics projects Philippine gross domestic product (GDP) to grow by 5.9% this year, slightly slower than its 6% baseline forecast in November.

For 2026, it also trimmed its Philippine GDP growth projection to 5.8% from 6.1% previously.

If realized, these forecasts would both fall short of the government’s 6-8% target for 2025 and 2026.

“While the expected growth is shy of the government’s target, it will mark the strongest expansion in three years,” Ms. Tan said in a webinar on Wednesday.

“Private consumption and investment will be the key driver of growth in the Philippines, supported by a stable inflation and easing monetary policy.”

Household spending typically accounts for about three-fourths of the Philippine economy.

On the other hand, Ms. Tan said the growth outlook was downgraded to account for the impact of recent US tariff policies.

Moody’s Analytics Head of Japan and Frontier Market Economics Stefan Angrick said the previous forecasts were produced in November before US President Donald J. Trump was elected president.

Since taking office in January, Mr. Trump has imposed a 20% levy on all Chinese imports; 25% tariffs on imports from Canada and Mexico, as well as duties of 25% on all steel and aluminum imports.

“Anything that happens outside the region, trade friction will depress growth elsewhere in the world. That will then feed into aggregate demand and depress growth in the Asia-Pacific region indirectly,” Mr. Angrick said.

“For (Asia-Pacific) overall, we expect GDP growth this year to come in just north of 3.5%, which is down from about 4% last year.”

The region is more exposed to these risks as it is dependent on free trade and is subsequently more vulnerable to a slowdown in global trade, Mr. Angrick said.

However, he noted that some parts of Southeast Asia do not heavily export to the US.

“The direct exposure to changes in the US tariff regime is more moderate,” he added.

Ms. Tan said the Philippines’ reliance on exports is “pretty small” compared with its neighbors.

“The impact of Trump policies on the Philippine economy is not as large as what we’re seeing in other countries, maybe like in Thailand or Indonesia,” she said.

“But the reciprocal tariffs or any tariffs that come from the US will definitely hurt the Philippine exporters, only because the US is the largest export destination for the Philippines.”

Mr. Trump has also threatened to impose reciprocal tariffs on countries that tax US imports as early as April.

“It is unlikely to leave a huge dent on the macroeconomy, but it will definitely hurt these exporters and manufacturers,” Ms. Tan added.

The US is the top destination for Philippine-made goods. Last year, Philippine exports to the US were valued at $12.12 billion or nearly 17% of total export sales.

EASING INFLATION

Meanwhile, Moody’s Analytics expects headline inflation to remain within the central bank’s 2-4% target until 2026.

“This year, we are expecting inflation to ease further and interest rates to go down even more and so that will boost private spending and investment,” Ms. Tan said.

Moody’s Analytics sees inflation averaging 2.8% this year and 3% in 2026.

The Bangko Sentral ng Pilipinas’ (BSP) baseline forecast for inflation is at 3.5% for both 2025 to 2026. Accounting for risks, inflation could hit 3.7% in 2026.

Moody’s Analytics Chief APAC Economist Steve Cochrane said central banks in the region will be able to further support their economy by reducing interest rates.

“It may be a very slow process, but there will be some continued normalization of rates going forward,” he added.

The BSP last month opted to keep its key rate steady at 5.75% amid global trade uncertainties.

However, BSP Governor Eli M. Remolona, Jr. has said they are still on an easing cycle, signaling the possibility of a 25-basis-point (bp) cut at the Monetary Board’s meeting on April 10.

Ms. Tan said they expect the BSP to cut by 50 bps to 5.25% by the end of 2025.

“As US tariffs could slow global demand and the pace of interest rate normalization, the Philippine central bank will be more cautious about monetary easing to avoid significant weakening of the peso,” she said.

STRUCTURAL REFORMS

Meanwhile, the International Monetary Fund (IMF) separately said that Southeast Asia, including the Philippines, could stand to benefit from the “ambitious” reform packages.

“Countries such as Indonesia, Malaysia, the Philippines, Thailand, and Vietnam — the five largest emerging markets out of 10 economies in the Association of Southeast Asian Nations (ASEAN) — could increase long-term real economic output,” IMF economist Anne-Charlotte Paret Onorato said in a blog.

On average, the IMF said growth in these economies could increase by 1.5% to 2% after two years and even as high as by 3% after four years if “comprehensive and simultaneous economy-wide reform packages” are implemented.

These reforms not only support faster potential growth but also help economies attain higher income levels, it said.

“Wide-ranging reforms can build resilience to shocks in the face of uncertainties and help the private sector drive growth,” it said, but noted these reforms often entail “substantial political economy challenges.”

The main structural areas these economies must address include trade openness, the IMF said.

“While the six main ASEAN economies are generally more open than the average emerging market in the Group of 20, these countries still have more barriers to trade  —and are relatively harder to trade with,” Ms. Onorato said.

“Improving logistics and trade facilitation to make cross-border transactions faster, cheaper, and less uncertain would help the five largest ASEAN emerging market countries boost economic growth.”

The multilateral institution also called for the need to address the “lagging services trade.”

The Philippines’ trade in services fell by 19.8% to $14.58 billion in 2024 from $18.18 billion in 2023, latest data from the central bank showed.

This as service exports rose by just 7.5% year on year to $51.98 billion from $48.33 billion compared with imports, which jumped by 24% to $37.4 billion from $30.15 billion.

This could help “maximize pro-competitive gains and technological spillovers, while creating high quality jobs,” the IMF said.

“In fact, the transition to a more services-based economy by emerging markets does not mean that the scope for catching-up with advanced economies’ income levels would be diminished — however, making the most of it requires facilitating the transition to highly productive services.”

The IMF noted the need for high-quality education and more apt job-matching to enhance productivity.

ASEAN economies must also improve investment attractiveness and further boost financial inclusion, it added.

“On human development, it is striking that all major ASEAN emerging market countries enjoy a demographic advantage relative to benchmarks,” Ms. Onorato said.

“In other words, they generally have relatively more people working than dependents (such as children and elderly individuals). Therefore, there is an opportunity to implement reforms now before aging populations increase fiscal burdens such as pensions and healthcare.”

Moving forward, the IMF said deliberate and ambitious structural reform packages can help bolster sustainable and inclusive growth.

“A major simultaneous reform package improving business and external regulation, governance, and human development could raise output levels by up to 3% after four years. The benefits from enacting a single major economic reform would be more modest.”

These reforms can also make economies more resilient amid external headwinds.

“Amid a shock-prone global environment, ambitious economy-wide structural reforms can also help build resilience by fostering diversified, broad-based, inclusive growth at the domestic level, and ensuring a credible and robust institutional framework to further unleash private sector-driven growth.”

Source: Business World